Actually, it’s more complicated than that.

Why does energy need to be consumed?

Let’s start with why Bitcoin needs to consume energy in the first place.

Energy is consumed by the ‘miners’ as they compete to maintain the network and process transactions in new ‘blocks’. In return for their work and energy, they’re rewarded with mining fees from the users and a set number of new bitcoins created according to a fixed supply scheme.

In order to create new blocks of transactions, miners need to verify that all the transactions are valid and also find the right hash to add a block to the blockchain.

These hashes can only be determined by trying out countless random combinations until the correct one is found. For Bitcoin, the miners test around 50 trillion hashes per second in total – making it the world’s most powerful supercomputer.

To be clear, all of this is necessary not to process transactions directly but the blocks that may contain many, many transactions. And new innovations like the Lightning Network could all but eliminate an upper limit in this regard by taking many transactions off chain.

How much energy are we talking about?

Bitcoin consumes around 30 terawatt hours of electricity annually. That’s comparable to the consumption of a small, developed country. Certainly, a lot. But compared to what?

Bitcoin is a full currency system, not merely a payment network (like VISA). It makes intermediaries obsolete, like banks – as well as all their branches, backend operations and ATM networks. In addition, unlike fiat monetary systems (notes and coins) or gold, no physical resource extraction or processing is required.

As Carlos Domingo explains in Hackernoon, when compared on this basis, Bitcoin is around 3 times more efficient that conventional banking infrastructure.

What’s more, Bitcoin regularly sees improvements to its underlying protocol, as well as second-layer solutions that increase its efficiency – by orders of magnitude.

There’s plenty of alarmism on the future trajectory of Bitcoin’s energy consumption. But these models tend to assume linear or even exponential increases, while in reality, energy consumption is likely to plateau as we approach mainstream adoption.

Why is this energy needed to protect the network?

The more energy that is expended, the more secure the Bitcoin network becomes. That’s because this is what protects the blockchain’s immutability.

Any malicious actor who wants to hack the system and enter fraudulent transactions onto the ledger would themselves have to provide more than the network’s total hashing power (and thus energy expenditure) to reorganise the blockchain. A herculean feat that has never occurred in Bitcoin’s ten-year history.

Where does the energy come from?

Energy consumption tells us nothing about whether the sources are harmful to the environment or actually renewable. This is often ignored in oversimplified media reports.

While Bitcoin mining in China largely uses fossil fuels that are in cheap supply, many mining hubs like Iceland rely predominantly on renewable sources such as geothermal and hydropower (source: Cointelegraph.com).

Plus, as expert Andreas Antonopoulos explains here, the profit incentive means that it is only practical for miners to operate where there is a ready supply of surplus energy – such as surplus periods with renewable sources, or where the generation of new power plants exceeds the consumption of the surrounding areas. In the case of the latter, the energy would otherwise largely be wasted and it could even allow plant operators to use early surpluses to recover their investments sooner.

TL;DR

Bitcoin consumes a lot of energy, but not when compared to similar monetary and banking systems. Much of this energy comes from readily available surpluses – including renewable sources – and ensures the network’s security. Extrapolations based on models tend to be highly exaggerated. All the while, innovation is boosting Bitcoin’s efficiency – both on and off chain.

This post was published by Lewis Dale, German-to-English translator and editor, who specialises in blockchain, finance, content and computer games.